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Autumn Statement: Gov't plans 'personalised' protection for pension savers

by William Robins on Dec 05, 2012 at 14:42

Autumn Statement: Gov't plans 'personalised' protection for pension savers

The government is planning a new protection regime to counter the lowering of the pensions lifetime allowance from £1.5 million to £1.25 million.

To protect people from retrospective tax charges HM Revenue & Customs (HMRC) said it would consult on plans for a personalised protection regime as part of the changes, which have also seen the annual allowance reduced from £50,000 to £40,000.

It is said the planned personalised protection will give individuals a lifetime allowance equal to the greater of the value of their pension rights on 5 April 2014, up to £1.5 million, and the standard lifetime allowance, which will be £1.25 million from April 2014.

Unlike fixed protection 2014, individuals with personalised protection can carry on saving in their pension scheme without losing their protection.

HMRC is also planning to introduce a transitional fixed protection regime. It will mean individuals who apply for fixed protection 2014 will have a lifetime allowance of the greater of £1.5 million and £1.25 million from April 2014. Those who apply for fixed protection will not be allowed to carry on saving into their pension without losing their protection, although those who opt for personalised protection will.

However there are two provisions:

  • Any pension savings above the individual’s lifetime allowance will be subject to a lifetime allowance charge when benefits are taken;
  • Personalised protection will only be available to those with pension pots over £1.25 million on 5 April 2014.

There are no proposed changes to the annual allowance carry forward rules. The amount of any unused allowances arising from the tax years 2011-12 to 2013-14 and available for carry forward to 2014-15 and subsequent years will use the £50,000 limit.

This means in 2016-17 savers will be able to carry forward up to £50,000 from 2013-14.

The carry forward limit for unused allowances arising in from 2014-15 and 2015-16 will be £40,000.

Chancellor George Osborne said the cuts to the lifetime and annual allowance would save £1 billion in tax relief each year.

In 2010 Osborne reduced the annual allowance from £255,000 to £50,000. Before the 2012 Budget in March there was speculation the government wished to limit pensions tax relief for the wealthy, however no changes were made then.

48 comments so far. Why not have your say?

PensionMan

Dec 05, 2012 at 13:27

How will the reduction in LTA work as my understanding is that under the Finance Act of 2004 the Lifetime Allowance cannot reduce but there is no legislative commitment to increase it annually?

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Sanjay Badhan

Dec 05, 2012 at 13:33

Well thank goodness they haven't amended the tax relief. This is still not a wise move, on one hand they want people to save for their own retirement, on the other hand they are cutting the incentives to make saving into a pension vehicle worthwhile.

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Xiang Xhi

Dec 05, 2012 at 13:51

An absolute shambres.

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Julian Stevens

Dec 05, 2012 at 13:52

Yet more negative news that will deter even more people from locking away money in a pension plan, regardless of whether or not they're likely to be directly affected by these latest announcements.

At this rate, the annual input allowance will soon be down to a figure no greater than the annual ISA input allowance and the LTA will be down to £500,000 or less.

How can anyone possibly have any faith in pensions any more as a vehicle for retirement saving?

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Lucky Escape

Dec 05, 2012 at 13:54

Every budget is 'in one hand and out of the other' no matter how it is dressed up. Ultimately there are always winners and losers. I just accept it now. I remember seeing a debate between Nigel Lawson and Norman Lamont a few years ago on the pros and cons of the Euro. These two were poles apart on their fiscal policy. Now if the supposedly brilliant economists with years of fiscal experience can't agree what's best for the UK, how the hell can the man in the street. Maybe we can get them together again but this time replace Nigel with Nigella. I'd probably watch that!

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Jamie Clark

Dec 05, 2012 at 13:58

@PensionMan...they can do whatever they want (and often do) - all they need is a Finance Act that amends a previous one...like they did with FA 2011 that reduced the LTA from 1.8 to 1.5m...one wonders when it will end...

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Sean McSweeney

Dec 05, 2012 at 14:01

Agree the constant tinkering is not good, but given the annual cost of £33 billion, as an industry, loosing £1 billion ish is probably not the worse result, particularly given Michael Johnson (Centre for Policy Studies) damning report on the effectiveness of pension tax relief as a whole!

Crucial for the industry to strongly lobby to acheive a robust protection regime for clients affected.

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John Smyth 3

Dec 05, 2012 at 14:10

Please stop whinging.

The majority of working people can not afford to put anything like £40,000 into a pension fund. Only a small majority of working people can and they have many other ways of reducing their tax bills anyway. Well done the PM for taking away a little of the benefits of the better off in order to avoid taking more from the less well off. The Labour party talked about doing it but never had the balls to do it for fear of upsetting their wealthier supporter.

If you can afford to put £40,000 a year into a pension plan you do not need incentives to save. It's the less well off that need any incentives that can be afforded.

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Alwaysright

Dec 05, 2012 at 14:18

Dear John Smith 3,

It is not just the "rich" affected by this.

here's an example:

Molly is Associate Director of Clinical Effectiveness for the Anywhere Primary Care Trust.

She earns £70,000 per annum and has been a member of the NHS Superannuation Scheme for 20 years.

This is a 1/60 scheme meaning that she accrues 1/60 of her final salary for each year of service.

Her total pension input amount for testing against the Annual Allowance is:

£70,000 x 20/60 x 16 = £373,333

At the end of the year she is promoted to Deputy Director of Clinical Effectiveness and her pay goes up by 10% to £77,000 pa

Obviously, she has an extra year of service so the sum looks like this:

£77,000 x 21/60 x 16 = £431,200

In the interests of fairness, the Government allows her previous entitlement of £373,333 to be increased by CPI. (£373,333 x 102.5% = £382,666)

Now, in order to calculate her notional annual accrual amount, we simply subtract the revalued starting valuation of £382,666 from the ending valuation of £431,200.

431,200 – 382,666 = £48,534. This figure is comfortably within the current annual allowance of £50,000.

However, excess amounts over the Annual Allowance are taxed at the individual’s highest marginal rate (In Molly’s case 40%)

So, with the reduction in the Annual Allowance to £40,000, Molly will be facing a tax bill of £3,413.60

Not a happy Molly.

And yes, I know she can ask the scheme to pay the tax but in exchange she will be subject to an actuarial reduction in her pension benefits. Pain now, or pain later?

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Sean McSweeney

Dec 05, 2012 at 14:20

Although the constant tinkering is not helpful, I agree with John Smyth 3 - overall cost of pensions tax relief is £33 billion and after the damning verdict of Michael Johnson in his recent report for the Centre for Policy studies on the ROI for UK PLC, maybe we got off lightly with a £1 billion ish "raid".

As an industry we really need to lobby hard for a robust new protection regime to protect those affected (as Gideon promised!).

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Mac Kot

Dec 05, 2012 at 14:30

Any MP with a 20 year service will also be hit!!

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Mike Morley via mobile

Dec 05, 2012 at 14:33

@alwaysright This is just the type of situation that Carry Forward was designed to cater for. As her normal accrual would be comfortably beneath the annual allowance - no tax bill!

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Phil Castle

Dec 05, 2012 at 14:45

The decrease from 50 to 40 isn't a major issue for my clients, but I do have one or two for whom the decrease in the LTA is goinbg to be a pain in the proverbial. Most of whom were senior at the NHS. Looks likely they will now simply consider early retirement instead of exceeding the LTA.....

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Lucky Escape

Dec 05, 2012 at 14:50

Alwaysright. Nice G60 pension work!

I agree that anyone who can afford to regularly put £40k in a pension has probably got many other additional assets to assit with their retirement. I can't see a solution to Mr and Mrs Average's dilemma though. We all know that we need to invest pretty significantly and over a long term to secure any semblance of decent retirement income in retirement (if through traditional pension saving) It doesn't matter what the incentive is if you can't afford to save anyway. If tax relief was 100% it still won't solve the problem if someone can only save a moderate amount or nothing at all. Using a 3% inflation rate a 20 year old who wants just £12,000 per annum (£45,379 inflation adjusted) in todays money at age 65 will need a pot of £1,134,475 and that is assuming a 4% annuity rate or a pot of £907,580 with a 5% annuity rate.! How the hell are they going to achieve that?

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Chris Holmes

Dec 05, 2012 at 14:57

@Mac Kot

Wrong. MP Pension scheme is unregistered: not subject to AA nor LTA, so we pay the tax on any benefits they take (as it is not exempt).

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Phil Castle

Dec 05, 2012 at 15:12

The article has changed since most of us posted our comments above. This personal protection may resolve some of the issues slightly, although it certainly isn't "pension somplification"!

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Still Deciding

Dec 05, 2012 at 15:13

@Always right

As I'm sure someone else will point out, earning over £70k a year is not an average earner. And yes earning over £70k a year does make her rich.

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Julian Stevens

Dec 05, 2012 at 15:16

To Mike LeGassick ~ hardly anyone is, are they? And, to make it worse, the government's doing nothing to address the ever decreasing rates at which pension fund capital can be converted to income. Our noble eunuch of a pensions minister refuses even to admit publicly that the problem exists.

I for one started over five years ago to lose faith in the very idea of funding for my retirement by way of a PP and last year I switched 100% Unit Trusts, rolling over my full ISA allowance every year. With luck, my total tax-assessable income in retirement will be just within my Personal Allowance and I might get away with not having to pay any tax at all on any of my retirement income. Income from an ISA is also exempt from means testing, which means that (with a bit more luck) I might actually be entitled to receive everything I'll have spent a working lifetime paying the State for. That's the plan anyway.

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Thornton Wells via mobile

Dec 05, 2012 at 15:19

Reducing the annual allowance also penalises those who have built businesses - they will likely contribute little or nothing as they build and reinvest profits. How do they catch up in later years?

If £250k actually represents ten or twenty years accrual paid in one year then we're no longer talking about the very wealthy.

I would also echo the above - constant tinkering has a negative affect, regardless of the intent.

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Mike Morley via mobile

Dec 05, 2012 at 15:20

So some of us are more "in it together" thjan others and certainly more "in it" than Georgie Porgie whose ministerial pension will be unaffected.

As commented on above the reduced LTA will be a real P I A for many reasonably senior staff in Final Salary schemes. Need to revisit those who were just OK with the £1.5 m but look likely to fall foul of the new lower limit. It is not the size of thje pot now for many people but its value at retirement particularly if further cuts are made.

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Jonathan Kirby

Dec 05, 2012 at 15:21

Nice to see that Pension simplification remains high on the agenda!

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Roydo

Dec 05, 2012 at 15:27

So, by my reckoning, we now seem to have at least 4 different types of "Protection". And counting.............

Without wishing to harp back to 2006, why on earth have an AA and a LTA; surely one or they other should suffice!

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Gavin Mackay

Dec 05, 2012 at 15:32

@ always right

we the tax payer are paying for these "Gold Plated" pensions. I am more than happy to see at least some of this excess clawed back. The sooner the public sector enters the real world of pensions, the better

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Titfertat

Dec 05, 2012 at 15:34

Ah, so earnings of £70k a year doesn't equal rich. In that case I'm on the breadline. Lucky old Molly.

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Stephen Page

Dec 05, 2012 at 15:36

Note to Chancellor: in your 'cutting of benefits' take a look at income from ISA's not being means tested! (That'll teach Julian Stevens for being so clever, he he he (mutley style) ) ;-)

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Kevin Edwards

Dec 05, 2012 at 15:40

70k pa hardly makes you rich if you're the sole earner for a family.

I think we're getting distracted. The reduction in the Annual Allowance is expected to raise 600m per year - peanuts.

How about tinkering with Corporation Tax so that multi nationals actually pay some?

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Harriet Marlow

Dec 05, 2012 at 15:48

@Alwaysright

That is exactly what I was going to ask, it doesn't take a huge salary increase (ok, I would start doing cartwheels at a £7k raise, but never mind that) to have people start falling into the annual allowance charge trap for defined benefit schemes.

As a young person I am currently building my savings in ISAs, a mix of S&S and Fixed interest. I know I should have a pension, but aside from the tax relief at source I am struggling to incentivise myself to start one. The annual fees would eat into my contributions, I can't touch it until I'm 55 (32 years away, and that's if they don't put the age up) I may not have any lump sun entitlement by then, longevity trends are continuing to improve - reducing my projected income even further... plus the effective deductions I see in pension illustrations make me wince.

For those of you advising on pensions, you must come across a lot of similar attitudes. How do you sell the benefits to a client?

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Gavin Mackay

Dec 05, 2012 at 15:52

@ Titfortat & Kevin Edwards

It isn't so much the 70K, its the "gold plated" public sector pension that we, the tax payers have to fund. Too right the chancellor should take some back, welcome to the real world In fact, why not go the whole hog- Abolish Super-ann! and instead 4% employer, 3% employee, 1% tax relief!!!!!

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Chris Holmes

Dec 05, 2012 at 16:00

@Harriet Marlow

Some really good points coming out of your posting. For starters, I think we can ignore the £7k (10%) pay increase as 'carry forward' was introduced to allow for spikes in earnings and DB accrual. The AA for 12/13 includes the carried forward, unused AA from previous years, so probably no tax charge arises here.

If you pay income tax at 20%, unless your employer is paying/matching contributions, then I agree that pensions hold little allure. If your employer is paying contributions and requires your input, then you would be crazy, subject to budgeting, not to opt in.

As a 40% or 50% taxpayer and income in retirement is at a lower rate, then pensions are very attractive. They are not for everyone.

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Alwaysright

Dec 05, 2012 at 16:03

Harriet,

It sounds as though you are doing exactly the right thing. There comes a point when the fact that you can't touch your pension pot becomes an advantage but, by the sound of things, you have not reached that stage of your life yet.

Unless you have access to a final salary scheme (In which case join now!), the tax advantages of pension savings for a basic rate taxpayer are negligible and the need for flexibility in your savings is far more important. How many people of your age can afford to maximise their ISAs and save for a pension as well?

Given the choice: go for the ISA. Even at the current depressed rate of AA there is still scope to catch up later.

Lastly: any savings you may need in next 5 or so years: keep in cash.

Any savings definitely 5 years plus: investment ISA.

You ask how advisers sell the benefits of pensions to clients? It's amazing how the prospect of a nice fat commission stirs the creative juices. Look out for a reduction in this kind of positioning when adviser remuneration changes in 2013!

None of the above should be construed as advice etc etc etc

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Umkomaas

Dec 05, 2012 at 16:04

Why doesn't Georgey Boy Shelfstacker just "simply" pensions completely - ie ban them?

Both the Condems and NewLieMore mess around with pensions - hacking around with the 'rules', messing around with contributions, mess around with tax-reliefs.

Then - their chums in the Bof E magic squillions of ££££ out of thin air - thereby giving annuity rates another kicking!

But all the time we're all 'in it together' - MPs, BofE have a gold plated pensions - perhaps they need to travel beyond a 1/2 mile radius of Westminster & see the REAL world - I won't hold my breath.

Just for the record - I saw PPPs ushered in ....so the amount of fiddling & tinkering I've seen would put War & Peace to shame. All the while our esteemed lords 'n' masters wonder why the hoi-polloi isn't gagging to pump money into a pension plan ... as a certain Mr Simpson might say D'Oh!

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Julian Stevens

Dec 05, 2012 at 16:17

It's quite possible that before too long somebody (a basic rate tax payer without the benefit of any third party contribution) will mount a successful complaint in respect of advice being given to invest money into a PP.

I suggest that, already, nobody fitting the above profile, if presented with an A:B comparison of a PP vs. an ISA would choose the former.

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Harriet Marlow

Dec 05, 2012 at 16:19

Thanks Chris and Alwaysright, it's nice to hear something outside of the usual "you must have a pension" approach which seems to start bombarding you before you've finished looking at your Student Loan statement and weeping.

Following your comments, I checked the carry forward rules and follow you now. Presumably you would need a lot of very rapid promotions or an expectionally large increase to still suffer a tax penalty?

I'm sitting my diploma at the moment so hoping to get my head around it all soon, but the rules seem to change faster than they can print the books!

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Chapman

Dec 05, 2012 at 16:19

@ alwaysright

You forgot to include inflation for the calculation of the input period

I think your client may just be ok!!

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Jonathan Kirby

Dec 05, 2012 at 16:22

@ Alwaysright

What decade are you coming from?

There have been virtually no payments of commission on pensions since Stakeholder came along.

Many companies have paid nothing at all and a recent AVIVA quote for £62.50 per month over 53 years (for a 2 year old) quoted commission of around £40 in total out of a premium of just under £40,000.

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Still Deciding

Dec 05, 2012 at 16:26

I'm sure that all of this change is just a conspiracy from the CII to force people to keep sitting exams.

@alwaysright, very good advice for Harriet.

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John Smyth 3

Dec 05, 2012 at 16:28

@alwaysright

In my post I did not use the word "Rich" I used "Better off" meaning better off than the vast majority of the working population of this country for whom I believe the average wage, including that of the better off is only about £26,000. We all have different views about who is rich so let us not go there.

Our democracy is supposed to protect minorities up to a point but support the interests of the majority.

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Alwaysright

Dec 05, 2012 at 16:33

Chapman:

No I didn't:

"In the interests of fairness, the Government allows her previous entitlement of £373,333 to be increased by CPI. (£373,333 x 102.5% = £382,666)"

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Philip Wise

Dec 05, 2012 at 16:54

Lots more clients will need advice as a result of this.

Not our fault

They cant expect to pay us by commission.

Not our fault

There are less financial advisers

Not our fault

The law of supply and demand says we can increase our fees as a result.

Not our fault.

Good times. Thank you George.

Not sure that was his intention.

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Julian Stevens

Dec 05, 2012 at 17:05

To JK ~ Skandia continued to pay commission long beyond the inception date of stakeholder and when they introduced their PP6 contract based on Adviser Charging spread over (up to) 2 years, I thought that was great, having stopped taking indemnity commission about 10 years ago.

Now, except for high earners and/or those who want to use every available penny of their input allowance, accumulation has become sufficiently straightforward that you can (if you're taking the long view) just about do it by way of a true Unit Trust retirement savings account. Okay, the initial commission's peanuts, but it's not too hard to sell the need for a fee in return for what (I believe) really is the best type of pension plan into which to save money (if at all). Take 3% initial + 0.75% annual trail and within a few years such a plan will be generating pretty reasonable recurring revenue, just like a decent ISA. These days, sustainability is all about recurring revenues.

April 2001 was a watershed because it marked a paradigm shift in our relationship with almost all the main providers ~ from that point on we would never again be able to trust the bastards. That was when we needed to read which way the wind was blowing and set our sails accordingly.

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Chris Holmes

Dec 05, 2012 at 17:11

@Philip Wise

It never is.....

The public can be better educated to make their own decisions.

We can all help

Commission distorted the market; fees are transparent

We can all help

There are better qualified advisers, compelled to better disclosure

We can all help

The law of supply and demand etc.

Competition on a level playing field and better IT solutions will drive down costs...

We can all help

Pretty lousy backdrop, George, but the future for financial planning is looking rosy!

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Julian Stevens

Dec 05, 2012 at 17:16

I agree with you Philip, having long believed that those of us who can survive the FSA's relentless carpet bombing of the past five years and still be here after 31st Dec may well find our services much in demand. There are going to be a lot of orphaned clients.

Those who refuse to pay a reasonable amount for our services will just have to scratch around elsewhere if they think they can quality advice for little or no money. They certainly aren't going to get it from totally sales-orientated outfits such as the banks or building societies or tied agents, qualified or otherwise, are they? All those outlets will be after is new investment money.

So we'll see ~ at least I shall still be here, hopefully to attract my share of clients needing to establish a fresh relationship with another IFA.

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sam thomas

Dec 05, 2012 at 17:46

So what now happens to those who registered for Fixed Protection earlier this year that tested their LTA at £1.8m. Does that mean it's now worthless?

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Philip Wise

Dec 05, 2012 at 17:47

When do you think the allowance will go down to £1million? 2016?

I wonder if William Hills will take a bet (come to think of it, that's not a bad way of insuring against further reductions!)

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Wolfie smith via mobile

Dec 05, 2012 at 23:10

@chris Holmes 14.57

This is exactly what is wrong, we should tell all of our client, family and friends and get this in the public domain. We would all have more respect if they lead by example and capped their gold plated scheme or stopped accrual and went to a money purchase. Don't begrudge the real workers earning their hard earnt retirement but this is just wrong.

Agree with @ Kevin Edwards time to vote with our feet

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David D

Dec 06, 2012 at 11:45

@ sam thomas...

I havent been able to find out anything yet on the fixed protection 2011 version and if changes. Logically it wont change but until we see it confirmed, we cant be sure.

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James Burn

Dec 08, 2012 at 14:18

Someone who had saved 12.2k (in today's money) into a pension each year from age 21 to 45 and had received a 5% real return rate would now have 582k saved. If then then stopped making pension contributions and over the next 10 years growth was at 8% (the higher projection rate), they would reach 1257k at age 55.

Median income is 20.6k. So someone on 33k gross could put 12.2k away and still have median income left. About 20% of the population earns more than that.

Of course, this person would be able to benefit from fixed protection. I just want to make the point that the change may affect diligent savers as well as people in higher rate tax brackets.

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James Burn

Dec 08, 2012 at 15:54

Just to clarify the above, someone who was aiming to retire around age 55 with an index linked annuity of 19.6k (no NI to pay from the pension, so the same spending power as median income) and with 66% joint life benefits would need to a pension pot of 860k. This would be the same as a pot of 639k at age 45 allowing for 2.5% inflation and 5% (the middle projection rate) growth over 10 years.

I am saying this just to show that someone might very well rationally save this much, if they were looking for early retirement.

Note that this person would have not just have got the basic tax relief from pension contributions but, depending on how the contributions were made, also the 12% NI relief.

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